Neil Woodford, the highly regarded fund manager, has sold all his shares in HSBC over fears that banks face "unquantifiable" fines from regulators.

Mr Woodford famously stopped investing in banks well before the financial crisis devastated their share prices, and his purchase of HSBC shares in May last year represented his first return to the sector since 2002.

He also included the bank's shares in the portfolio of his new Woodford Equity Income fund when it was launched in June this year.

Mr Woodford said HSBC remained "a conservatively managed, well capitalised business" but that he had sold the shares because one of particular risk: that of “fine inflation” in the banking industry.

He explained that regulators had been imposing huge fines on banks for past failings, such as a $1.9bn (£1.1bn) penalty for HSBC in 2012 for failing to prevent Mexican drug cartels laundering money through its bank accounts. He said the size of such fines seemed to be determined by banks' "ability to pay" rather than the seriousness of their misconduct. In other words, the more successful the bank, the bigger the fine.

Mr Woodford said: "In recent weeks I have started to become more concerned about one particular risk: that of 'fine inflation' in the banking industry. I am worried that the ongoing investigation into the historic manipulation of Libor and foreign exchange markets could expose HSBC to significant financial penalties. Not only are these potentially serious offences in the eyes of the regulator, but HSBC is very able to pay a substantial fine.

"The size of any potential fine is unquantifiable, so this represents an unquantifiable risk. Nevertheless, a substantial fine could hamper HSBC’s ability to grow its dividend, in my view. I have therefore sold the fund’s position in HSBC, reinvesting the proceeds into parts of the portfolio in which I have greater conviction."

He added: "I’m not suggesting that HSBC is a bad investment, but in the light of this growing risk I now view the shares as broadly fair value. By contrast, there are plenty of stocks I can invest in which look significantly below fair value – AstraZeneca, BAE Systems, Drax, Legal & General to name a few of the positions that have been recently increased – and I believe the long-term interests of my investors will be better served by focusing the portfolio towards them."

It is understood that Mr Woodford made a decent profit on the Woodford Equity Income fund's holding of HSBC, buying at about 600p on average and selling at about 630p.

Fund managers are split on the merits of bank shares. Richard Buxton, another respected investor and the manager of the Old Mutual UK Alpha fund, has three high street banks in his top 10 holdings, including HSBC in the top spot. And Jeremy Lang, manager of the Ardevora UK Income fund, recently bought shares in TSB, his first purchase of bank shares since the financial crisis.